CSFS Course 5
Actuarial, Legal, Reporting and Disclosure
Setting rates and attachment points, the actuarial basis behind them, and the reporting and disclosure obligations a plan sponsor carries — including the documents that prove the plan exists.
315 practice questions · page 2 of 7, questions 51–100 · answers and explanations included · updated September 2026
50 questions on this page 2 of 7, each with the answer and the reasoning behind it. Read straight through, or quiz yourself on them and the ones you miss stay in rotation until you get them right.
- 51
The course notes a disadvantage when the employer uses an accountant-provided actuary for claim reserves. What is this disadvantage?
- •The accountant-provided actuary is prohibited from communicating directly with the plan supervisor
- •The actuary's independence is automatically compromised under AICPA standards
- •The employer may have a diminished voice in the claim reserve setting process
- •The resulting certification cannot be used for COBRA premium determinations
Show answer
The employer may have a diminished voice in the claim reserve setting process
The course states that some accounting firms with consulting/risk management services will use their actuary as a marketing advantage. However, with the accountant-provided actuaries, the employer may have a diminished voice in the claim reserve setting process.
- 52
In the sample-by-month method example, the mean claim reserve as a percentage of annualized paid claims across four months was calculated to be what value?
- •12.5%
- •14.5%
- •15.0%
- •16.5%
Show answer
14.5%
The course example shows four months with claim reserve percentages of 14%, 15%, 17%, and 12%, yielding a mean of 14.5%. The 95% confidence interval was stated as 12.5% to 16.5%.
- 53
Lag study projection reserves may be expected to approximate what multiple of an average month's claims?
- •1.0 times an average month's claims
- •1.4 times an average month's claims
- •1.8 times an average month's claims
- •2.5 times an average month's claims
Show answer
1.8 times an average month's claims
The course states that lag study projection reserves may be expected to approximate 1.8 times an average month's claims. In contrast, when developed claims data is not available, the incurred/unreported reserve alone will normally approximate 1.4 times an average month's claims.
- 54
When developed claims data is not available, the course recommends a two-step approach to estimate reserves. What approximation is given for the incurred/unreported portion?
- •Approximately 0.8 times an average month's claims
- •Approximately 1.4 times an average month's claims
- •Approximately 1.8 times an average month's claims
- •Approximately 2.0 times an average month's claims
Show answer
Approximately 1.4 times an average month's claims
When developed claims data is unavailable, the recommended method is to (1) estimate the incurred/reported claims using a claim worksheet, and (2) estimate the incurred/unreported claims, which will normally approximate 1.4 times an average month's claims.
- 55
The American Academy of Actuaries guide sets standards for two types of health reserves. What are they?
- •IBNR reserves for unreported claims and in-course-of-settlement reserves for reported claims
- •Medical reserves based on service dates and disability reserves based on onset dates
- •Specific reserves for individual large claims and aggregate reserves for total plan exposure
- •Tabular reserves for long-duration claims (e.g., ongoing disability) and triangle reserves for normal claims where processing lag causes the liability
Show answer
Tabular reserves for long-duration claims (e.g., ongoing disability) and triangle reserves for normal claims where processing lag causes the liability
The guide sets standards for both (1) tabular reserves, used where the participant is expected to continue for a long period of time (e.g., an ongoing disability), and (2) triangle reserves, used for normal claims where the processing and payment lag is the reason for the liability.
- 56
For postretirement medical reserves, which assumptions are acceptable and which is specifically excluded?
- •All five assumptions (interest, mortality, withdrawal, utilization, and inflation) are acceptable
- •Interest, inflation, and mortality are acceptable; withdrawal and utilization are not accepted
- •Interest, mortality, withdrawal, and utilization are acceptable; inflation is not accepted
- •Only interest and mortality are acceptable; withdrawal, utilization, and inflation are excluded
Show answer
Interest, mortality, withdrawal, and utilization are acceptable; inflation is not accepted
The course states that for postretirement medical reserves, acceptable assumptions include interest, mortality, withdrawal, and utilization. Inflation will not be accepted as an assumption.
- 57
The safe harbor provision under IRC Section 419A excuses the employer from what, while still requiring what?
- •It excuses the employer from both actuarial certification and establishing reserves if the plan has fewer than 100 participants
- •It excuses the employer from establishing any reserve but not from obtaining actuarial certification
- •It excuses the employer from filing IRS Form 990 but not from maintaining a qualified trust
- •It excuses the employer from obtaining an actuarial certification but not from establishing a reasonable reserve
Show answer
It excuses the employer from obtaining an actuarial certification but not from establishing a reasonable reserve
The course states that the safe harbor excuses the employer from obtaining an actuarial certification, but not from establishing a reasonable reserve. For example, if the best estimate is $130 and the safe harbor is $120, the employer may use $120 without certification or seek certification of the $130.
- 58
The welfare benefit fund rules under IRC Section 419 apply only to plans shared by how many unrelated employers, and what additional requirement must the fund meet?
- •Any number of unrelated employers, provided the fund has actuarially certified reserves
- •Fewer than 10 unrelated employers, and the fund must have the risk element — passing risk to an insurer for a set premium disqualifies it
- •Fewer than 25 unrelated employers, and the fund must maintain reserves equal to at least 35% of annual claims
- •Fewer than 50 unrelated employers, and the fund must have an independent trustee
Show answer
Fewer than 10 unrelated employers, and the fund must have the risk element — passing risk to an insurer for a set premium disqualifies it
The course states that the welfare benefit rules apply only to plans shared by fewer than 10 unrelated employers. Additionally, the welfare fund must have the risk element; passing the risk off to an insurer for a set premium will not qualify the plan for the IRC Section 419 rules.
- 59
In the lag study projection example, the estimated claim reserve was 30 but the actual experience reserve turned out to be 32. What does this comparison demonstrate?
- •The actuary systematically understates reserves by approximately 6-7% and should add a margin
- •The difference exceeds actuarial standards and requires a restatement of the prior year's financials
- •The lag study method is unreliable and should be replaced by the formula method
- •The lag study projection method provides data needed to test the accuracy of prior claim reserves established
Show answer
The lag study projection method provides data needed to test the accuracy of prior claim reserves established
The course uses this example (estimated 30 vs. actual 32) to illustrate that the lag study projection method also gives data needed to test the accuracy of prior claim reserves established. The comparison is a normal part of the actuarial process.
- 60
According to the due diligence questions, the actuary may sign off on claim reserves either as a best estimate or with margins, provided what condition is met?
- •The accountant provides written approval of the margins used
- •The assumptions are set forth in the actuary's certification
- •The margins do not exceed 10% of the best estimate
- •The plan sponsor acknowledges the margins in a separate written agreement
Show answer
The assumptions are set forth in the actuary's certification
Question 1 of Section B states that the actuary can sign off on reserves either best estimate or with margins as long as the assumptions are set forth in the actuary's certification.
- 61
When the purpose of the claim reserve is for tax deduction determination, the reserve normally includes an allowance for claim processing expenses. What is the typical range of such expenses?
- •1% to 2% of claims for the majority of plan supervisors
- •15% to 20% of claims for the majority of plan supervisors
- •3% to 5% of claims for the majority of plan supervisors
- •8% to 12% of claims for the majority of plan supervisors
Show answer
3% to 5% of claims for the majority of plan supervisors
Question 2 of Section B states that where the purpose is for tax deduction determination, the claim reserve will normally include an allowance for claim expenses. Claim expenses are in the 3%-5% of claim range for the majority of plan supervisors. Otherwise, such allowances are ignored.
- 62
Preferred provider repricing programs delay claims at three different levels depending on how billing flows. Which scenario causes the most significant delay?
- •When provider bills go directly to the PPO without plan supervisor involvement
- •When provider bills go indirectly to the PPO through the plan supervisor
- •When repricing is done by the plan supervisor internally
- •When the PPO and plan supervisor share a common claims processing platform
Show answer
When provider bills go indirectly to the PPO through the plan supervisor
Question 3 discusses managed care effects on claims. Repricing delays are: very little when done by the plan supervisor; moderate when done by the PPO with direct billing; and significant when bills go indirectly to the PPO through the plan supervisor. The course notes this indirect practice might be followed where claims delay is desired.
- 63
How should lawsuits be treated in relation to the actuarial claim reserve?
- •As a contingent liability excluded from both the claim reserve and the financial statements
- •As a specially computed liability separate from the claim reserve, likely performed by an accountant
- •As an additional margin added to the IBNR component of the claim reserve
- •As part of the lag study with the incurred date set to the date the lawsuit was filed
Show answer
As a specially computed liability separate from the claim reserve, likely performed by an accountant
Question 4 of Section B states that lawsuits should be treated as a specially computed liability and not as a claim reserve. Any lawsuit calculations can likely be performed by an accountant.
- 64
When the lag study is based upon a benefit content of 100 and the following period's benefits are 90, how should the actuary handle this in the reserve computation?
- •The 10% differential should be reflected in the actuary's computation as a downward adjustment
- •The actuary should ignore the difference because lag study data is historical and should not be modified
- •The actuary should increase the reserve by 10% to be conservative
- •The actuary should request a new lag study based on the projected benefit level before computing reserves
Show answer
The 10% differential should be reflected in the actuary's computation as a downward adjustment
Question 5 addresses reasonableness tests. If the lag study is based upon benefit content of 100 and the benefits for the following period are 90 (as determined by a benefit content study), the 10% differential should be reflected in the actuary's computation.
- 65
When lag study data is unreliable or scanty, what does the course recommend for achieving greater accuracy?
- •Applying the formula method with a standard 16% factor
- •Extending the lag study period to 24 months
- •Requesting raw claim-level data from the stop-loss carrier
- •Using industry averages
Show answer
Using industry averages
Question 5 states that unreliable and/or scanty data should not be used. Greater accuracy will be achieved by using industry averages.
- 66
For institutional care, the incurred date is usually the date of discharge to minimize the lag. Under what circumstance would the date of admission be used instead?
- •When plans are seeking maximum reserves, because the date of admission produces larger claim reserves
- •When required by SOP 92-6 for all institutional claims regardless of plan preference
- •When the institutional stay exceeds 30 days and crosses a plan year boundary
- •When the plan uses a 12/15 specific stop-loss contract to align with the contract's incurred date definition
Show answer
When plans are seeking maximum reserves, because the date of admission produces larger claim reserves
Question 7 states that for institutional care, the incurred date is usually the date of discharge so as to minimize the lag. Plans seeking maximum reserves should elect the date of admission because this incurred date will produce larger claim reserves.
- 67
What is the proper incurred date for maternity prepayments (OB-GYN charges)?
- •The date of conception
- •The date the pregnancy was first confirmed by a physician
- •The estimated delivery date
- •The same as the paid date of such prepayments
Show answer
The same as the paid date of such prepayments
Question 7 states that the incurred date for claims paid for OB-GYN charges as maternity prepayments should be the same as the paid date of such prepayments.
- 68
Lag study claims should exclude claims above the specific stop-loss limit. If a computer system provides a lag study gross of specific claims, what two ways are reserves overstated?
- •The claims in total are overstated, and the above-specific claims lag is significantly higher than below-specific claims due to size and complexity
- •The development factors are inflated by outliers, and the ultimate loss ratio is distorted by large claim recoveries
- •The IBNR portion is double-counted, and the in-course-of-settlement portion includes stop-loss receivables
- •The reserves include future projected claims, and the trend factor is applied to both plan and carrier liabilities
Show answer
The claims in total are overstated, and the above-specific claims lag is significantly higher than below-specific claims due to size and complexity
Question 10 states that many computer systems include claims above specific in the lag study, overstating reserves in two ways: (1) the claims en toto are overstated and (2) the above specific claims lag is significantly higher than below specific due to the size and complexity characteristics of such claims.
- 69
Should a forthcoming aggregate stop-loss claim be treated as an offset to the claim reserve?
- •No; aggregate claims should be completely excluded from both assets and liabilities on the employer's statements
- •No; it should be treated as a positive asset item clearly indicating its nature, rather than a deduction or offset from the claim reserve
- •Yes; aggregate stop-loss receivables should directly reduce the IBNR portion of the claim reserve
- •Yes; but only when the employer's financial year and the plan year are congruent
Show answer
No; it should be treated as a positive asset item clearly indicating its nature, rather than a deduction or offset from the claim reserve
Question 10 states that recognition of a forthcoming aggregate claim may be an appropriate employer asset for audited financials and tax filing. It is considered a positive asset item, clearly indicating its nature, rather than a deduction or offset from the claim reserve.
- 70
What impact does stop-loss provided terminal liability coverage have on the claim reserve?
- •It increases the claim reserve because the specific changes from 12/15 to 12/12 upon termination
- •It reduces the claim reserve by the amount of terminal liability coverage purchased
- •It replaces the need for an actuarially determined claim reserve with the carrier's own estimate
- •None; it provides comfort that walking-away costs are limited but does not affect the claim reserve
Show answer
None; it provides comfort that walking-away costs are limited but does not affect the claim reserve
Question 10 states the impact is none. Terminal liability coverage provides the employer comfort that its walking-away cost is limited and measurable. The claim reserve is the accountant's attempt to match income with expenses. The 12/15 specific becomes a 12/12 if terminated; terminal liability restores it to 12/15.
- 71
The Look-Ahead Method uses claims paid after the valuation date to estimate the reserve. If the valuation date is June 30 and computation date is October 5, approximately what percentage of the claim reserve is expended during the first three months with certain plan types?
- •Approximately 75%
- •Approximately 85%
- •Approximately 92%
- •Approximately 98%
Show answer
Approximately 92%
Question 11 describes the Look-Ahead Method: if valuation date is June 30 and computation is Oct. 5, the claims paid during July, August, and September are the basis of a reasonable estimate. Approximately 92% of claim reserve is expended during the first three months with certain type plans.
- 72
The Formula Method for computing claim reserves applies a predetermined percentage to the current year's paid claims. What is another name for this method?
- •The projection method
- •The run-in-adjusted method
- •The sample-by-month method
- •The tabular method
Show answer
The tabular method
Question 11 describes the Formula Method where a predetermined percentage (16%, e.g.) is applied to current year's paid claims. Such method is often referred to as the tabular method. Tables of percentages, varying by nature of group, size of specific limit, etc., serve as the basis of the selected percent.
- 73
Should the actuary test the claim computation by examining claims paid beyond the calculation date? What is the exception?
- •No, because post-calculation claims introduce bias from benefit changes in the new period
- •No, unless the plan sponsor specifically requests such testing in the engagement letter
- •Yes, unless the completion data is less than one month after the calculation date
- •Yes, unless the plan has terminal liability coverage in place
Show answer
Yes, unless the completion data is less than one month after the calculation date
Question 13 states that the answer is yes, the actuary should test by examining claims paid beyond the calculation date, unless the completion data is less than one month after the calculation date. Valuable insight is available with this look-ahead practice.
- 74
Is it good practice for the actuary to show the run-out against the previous claim reserve computation?
- •No, because prior period comparisons may create legal exposure if reserves were previously understated
- •Only when specifically requested by the accountant or plan sponsor
- •Only when the plan has been in existence for more than three years
- •Yes, and even when not shown, the actuary should make such comparison as part of the computation routine
Show answer
Yes, and even when not shown, the actuary should make such comparison as part of the computation routine
Question 14 states it is good practice for the actuary to show the run-out against the previous claim reserve computation, if only as a matter of courtesy. Even when not shown, the actuary should make such comparison as part of the computation routine.
- 75
What effect does electronic data interchange (EDI) have on claim reserves?
- •It decreases lag time and needed reserves quickly and significantly
- •It has no measurable effect because EDI only changes the format, not the timing, of claims
- •It increases lag time because electronic systems require additional validation steps
- •It increases reserves because electronic claims are processed in larger batches
Show answer
It decreases lag time and needed reserves quickly and significantly
Question 15 states that the effect of electronic claims processing (EDI) on claim reserves is quick and significant, decreasing lag time and needed reserves.
- 76
A drug card plan's existence will predictably have what effect on the claim reserve, and why?
- •A reduction in the claim reserve, because drug claims payment acceleration is a goal of the drug card
- •An increase in the claim reserve, because drug card claims add a new benefit category with its own lag
- •An increase in the claim reserve, because drug card plans increase total plan utilization
- •No effect, because prescription claims are excluded from the lag study by convention
Show answer
A reduction in the claim reserve, because drug claims payment acceleration is a goal of the drug card
Question 3 discusses how drug card plans affect reserves. Since drug claims payment acceleration is a goal of the drug card, its existence will predictably result in a reduction in the claim reserve.
- 77
SOP 92-6 was created by the AICPA to guide accountants on what specific matter?
- •How COBRA premiums should be actuarially computed for self-funded plans
- •How employer contingent liabilities should be recognized on GAAP financial statements
- •How the claim reserve should be determined for the independent accountant's opinion on the DOL/IRS Form 5500
- •How trust tax returns should reflect claim reserves for IRS Form 990
Show answer
How the claim reserve should be determined for the independent accountant's opinion on the DOL/IRS Form 5500
The course states that SOP 92-6 was created by the AICPA to guide accountants on how the claim reserve should be determined for the independent accountant's opinion on the DOL/IRS Form 5500.
- 78
Of the three reporting entities of interest to the accountant — employer, trust, and plan — which is affected by SOP 92-6 and why?
- •All three entities are affected because SOP 92-6 establishes universal reserve standards
- •Only the employer (IRS Form 1120) and the trust (IRS Form 990), because SOP 92-6 addresses tax-related reserves
- •Only the plan (DOL/IRS Form 5500), because SOP 92-6 deals with plan matters that exclude employer or trust matters
- •Only the trust and the plan, because SOP 92-6 does not apply to employer-level GAAP financials
Show answer
Only the plan (DOL/IRS Form 5500), because SOP 92-6 deals with plan matters that exclude employer or trust matters
The course states that the three reporting entities are (a) employer (IRS Form 1120), (b) trust (Form 990 if qualified or 1041 if not), and (c) plan (DOL/IRS Form 5500). Only the DOL/IRS Form 5500 is affected by SOP 92-6 because it deals with plan matters that would exclude employer or trust matters.
- 79
Which types of plans may ignore SOP 92-6, and why?
- •Employer-sponsors of self-funded general asset plans or fully insured plans, because such plans are not required to be audited
- •Plans using the safe harbor reserve method under IRC Section 419A, because safe harbor supersedes SOP 92-6
- •Plans with fewer than 100 participants, because the DOL exempts small plans from audit requirements
- •Taft-Hartley plans, because they are governed exclusively by the Taft-Hartley Act rather than ERISA
Show answer
Employer-sponsors of self-funded general asset plans or fully insured plans, because such plans are not required to be audited
The course states that SOP 92-6 has no influence on whether a plan's financials should be audited; it only gives guidance as to the format of the audit where one is done. Employer-sponsors of self-funded general asset plans or fully insured plans may ignore SOP 92-6 because such plans are not required to be audited.
- 80
SOP 92-6 replaces the traditional definition of claims (when service is performed) with a new definition. What is the new definition?
- •The discounted value of claims reported but unpaid as of the financial statement date, excluding unreported claims
- •The present value of the estimated future and ultimate cost of settling the claims, including estimated costs to be incurred after the financial settlement date
- •The sum of all claims paid during the plan year plus an actuarially determined IBNR based on service dates
- •The total amount of claims received and entered into the processing system as of the financial statement date
Show answer
The present value of the estimated future and ultimate cost of settling the claims, including estimated costs to be incurred after the financial settlement date
SOP 92-6 changes the traditional definition of claims from when service is performed to 'the present value of the estimated future and ultimate cost of settling the claims, including estimated costs to be incurred after the financial settlement date.' Benefit obligations measure the incurred date from the date of accident or onset of illness.
- 81
In the SOP 92-6 example, a participant diagnosed with a heart condition on Dec. 15 requires open-heart surgery in January costing $95,000. What is the SOP 92-6 reserve as of Dec. 31?
- •$400, because only the service performed before Dec. 31 creates a reserve under any standard
- •$47,700, because the reserve should be discounted to present value at a standard medical inflation rate
- •$95,000, because the Dec. 15 visit is in course of settlement and not part of the IBNR reserve
- •$95,400 ($400 for the Dec. 15 visit plus $95,000 for the estimated open-heart surgery)
Show answer
$95,400 ($400 for the Dec. 15 visit plus $95,000 for the estimated open-heart surgery)
The traditional reserve would be $400 as of Dec. 31. The SOP 92-6 reserve will be $400 plus $95,000 ($95,400). SOP 92-6 is explicit that the ultimate cost is the settlement cost, and the open-heart surgery is a claim incurred prior to Dec. 31 because the condition was diagnosed then.
- 82
Does SOP 92-6 have any tax implications?
- •No; but only if the employer elects the safe harbor method under IRC Section 419A
- •No; IRC Section 419A stands unchanged by SOP 92-6
- •Yes; SOP 92-6 reserves replace IRC Section 419A reserves for tax deduction purposes
- •Yes; the higher SOP 92-6 reserve amount becomes the maximum deductible contribution
Show answer
No; IRC Section 419A stands unchanged by SOP 92-6
The course explicitly addresses this as one of three practical implications: SOP 92-6 has no tax implications. IRC Section 419A stands unchanged by SOP 92-6.
- 83
When determining COBRA premiums using claim reserves, should the actuary use SOP 92-6 reserves or IRC Section 419A reserves?
- •Neither; COBRA premiums should be based solely on paid claims without any reserve component
- •The higher SOP 92-6 reserves rather than the lower IRC Section 419A reserves
- •The lower IRC Section 419A reserves to keep COBRA premiums as low as possible for beneficiaries
- •Whichever reserve the plan sponsor elects in its plan document
Show answer
The higher SOP 92-6 reserves rather than the lower IRC Section 419A reserves
The course states that SOP 92-6 does have COBRA premium implications. In determining COBRA premiums and using claim reserves as part of the computation, the actuary should use the higher SOP 92-6 reserve rather than the lower IRC Section 419A reserves.
- 84
Is there an obligation to fund an SOP 92-6 reserve with hard assets?
- •No; but the plan must disclose the unfunded amount as a contingent liability on Schedule A of Form 5500
- •No; the liability may be offset by a write-in or soft asset such as 'unfunded claim reserves' rather than cash
- •Yes; all SOP 92-6 reserves must be fully funded with plan assets held in trust
- •Yes; but only for plans with more than 500 participants or $5 million in assets
Show answer
No; the liability may be offset by a write-in or soft asset such as 'unfunded claim reserves' rather than cash
The course states there is no obligation to fund an SOP 92-6 reserve. The liability may be offset by a write-in or soft asset (unfunded claim reserves, e.g.) as opposed to a hard asset (cash, e.g.).
- 85
SOP 92-6 states that the IBNR for self-funded plans must not extend beyond what time boundary?
- •12 months after the financial statement date
- •The date the participant's employment terminates, with no extensions considered
- •The end of the current plan year regardless of ongoing treatment
- •The maximum coverage extension period should the covered person terminate (i.e., the COBRA continuation date)
Show answer
The maximum coverage extension period should the covered person terminate (i.e., the COBRA continuation date)
The course states that estimated cost should reflect the plan's obligation to pay claims regardless of employment status beyond the financial statement date, but should not extend beyond the maximum coverage extension period should the covered person terminate. SOP 92-6 is explicit that the boundary is the COBRA continuation date.
- 86
For Taft-Hartley plans, what is the financial consequence of the larger SOP 92-6 reserves compared to single employer trusteed plans?
- •The larger reserves are recognized as a real liability which, if left unfunded, would be a real and significant burden to the plan's benefits and funding
- •The larger reserves reduce the employers' required contributions because the trust already holds sufficient assets
- •The reserves create a tax benefit for the contributing employers that offsets the funding burden
- •There is no financial consequence because all SOP 92-6 liabilities are offset by soft assets regardless of plan type
Show answer
The larger reserves are recognized as a real liability which, if left unfunded, would be a real and significant burden to the plan's benefits and funding
The course states that for single employer trusteed plans, there is no financial consequence to SOP 92-6. But with Taft-Hartley plans, where employers and workers share the plan/trust as equals, the larger SOP 92-6 reserves will be recognized as a real liability which, if left unfunded, would be a real and significant burden.
- 87
Under SOP 92-6, what are defined contribution health and welfare benefit plans?
- •Flexible spending accounts and Archer Medical Saving Accounts
- •Plans funded exclusively through employee payroll deductions without employer matching
- •Plans that reimburse medical expenses up to a defined annual maximum per participant
- •Plans where the employer contributes a fixed dollar amount per participant toward insurance premiums
Show answer
Flexible spending accounts and Archer Medical Saving Accounts
The course states that defined contribution health and welfare benefit plans include the so-called flexible spending accounts and would also include the Archer Medical Saving Accounts.
- 88
Under SOP 92-6, when a premium stabilization reserve held by an insurer is forfeited upon plan termination, how is it treated as a plan asset?
- •It is excluded entirely from plan assets and disclosed only in footnotes
- •It is treated as a guaranteed plan asset at full face value
- •It is valued at 50% of face value as a standard actuarial convention
- •It will be cloudy as a good plan asset because it may be forfeited
Show answer
It will be cloudy as a good plan asset because it may be forfeited
The course states that premium stabilization reserves are sums held by insurers as an offset against future premium payments. Where such reserves are forfeited when the plan terminates, they will be cloudy as a good plan asset.
- 89
Under SOP 92-6, how should all plan assets be reported on the Statement of Assets Available for Benefits?
- •At amortized cost with footnote disclosure of fair market value
- •At fair market value
- •At historical cost less accumulated depreciation
- •At the lower of cost or market value
Show answer
At fair market value
The course states that under SOP 92-6, all assets should be reported at fair market value on the Statement of Assets Available for Benefits.
- 90
When the plan supervisor acts as agent for stop-loss purposes, what approach should the supervisor take regarding SOP 92-6 IBNR data and the stop-loss carrier?
- •Answer only questions asked and volunteer no clarifying or expanding information, because the supervisor is motivated only by the employer's and plan's best interest
- •Proactively share all IBNR data with the stop-loss carrier to ensure transparent underwriting
- •Provide the SOP 92-6 data only if the carrier offers a lower renewal premium in exchange
- •Withhold all reserve data from the carrier and direct the carrier to request it from the accountant
Show answer
Answer only questions asked and volunteer no clarifying or expanding information, because the supervisor is motivated only by the employer's and plan's best interest
The course distinguishes between the plan supervisor as agent vs. co-underwriter. As agent, the supervisor is motivated only by the employer's and plan's best interest and should answer only questions asked, volunteering no clarifying or expanding information.
- 91
Under SOP 92-6, postretirement benefit obligations must be computed based on four assumptions. Which of the following correctly states the spreading requirement?
- •The total cost should be allocated equally across all plan years from hire date to retirement date
- •The total cost should be recognized immediately upon the participant's retirement date
- •The total cost should be spread over the expected retirement period using mortality tables
- •The total cost should be spread over the participant's active working lifetime up to the date of being 100% vested
Show answer
The total cost should be spread over the participant's active working lifetime up to the date of being 100% vested
The course states that postretirement benefit obligations are: (1) present value of all future benefits, (2) due to services rendered to date, (3) assuming plan remains in effect, (4) assuming all assumptions are fulfilled. The total cost should be spread over the participant's active working lifetime up to date of being 100% vested.
- 92
Under SOP 92-6, participant contributions collected by payroll deduction are included in the Statement of Changes in Assets. What about contributions shifted to employer contributions by means of a premium reduction plan?
- •They are included as employer contributions only if the premium reduction plan is documented in the plan document
- •They are included as participant contributions with a footnote explaining the premium reduction arrangement
- •They are not included in participant contributions
- •They are split equally between participant and employer contributions on the statement
Show answer
They are not included in participant contributions
The course states that participant contributions (funds collected by payroll deduction) should be included. Participant contributions shifted to employer contributions by means of a premium reduction plan are not included as participant contributions.
- 93
Monte Carlo simulation shows expected claims at three comfort levels. What are these levels?
- •50%, 75%, and 90%
- •67%, 95%, and 99.7%
- •80%, 90%, and 95%
- •90%, 95%, and 99%
Show answer
67%, 95%, and 99.7%
The course states that Monte Carlo simulation shows expected claims arranged at 67%, 95%, and 99.7% comfort levels for various stop-loss configurations.
- 94
In Monte Carlo simulation for healthcare plans, the estimated standard deviation of paid claims for covered persons is generally in what range relative to the mean?
- •1x to 2x the mean
- •2x to 3x the mean
- •4x to 6x the mean
- •8x to 10x the mean
Show answer
4x to 6x the mean
The course states that the estimated standard deviation of paid claims for covered persons is generally in the range of 4x to 6x the mean. The higher the standard deviation, the higher the stop-loss premiums will be.
- 95
In the Monte Carlo simulation example, a 900-life plan with 720 estimated claims simulated with 100 trials using seed 1 would use how many random numbers?
- •7,200 (72 x 100)
- •72,000 (720 x 100)
- •720,000 (720 x 1,000)
- •90,000 (900 x 100)
Show answer
72,000 (720 x 100)
The course states that if a 900-life plan with an estimated 720 claims is to be simulated with 100 trials, using a seed of 1, we would use the first 72,000 (720 x 100) random numbers for the sample.
- 96
In Monte Carlo simulation, each random number uniquely determines the claim size by means of what probability distribution?
- •The lognormal probability curve — a bell-shaped curve with a very long right-hand tail
- •The Poisson distribution commonly used for discrete event modeling
- •The standard normal (Gaussian) distribution with symmetric tails
- •The uniform probability distribution where all claim sizes are equally likely
Show answer
The lognormal probability curve — a bell-shaped curve with a very long right-hand tail
The course states that each random number would uniquely determine the claim size by means of the lognormal probability curve, described as a bell-shaped curve with a very long right-hand tail.
- 97
What is the definition of 'minimax' as used in the context of Monte Carlo simulation output?
- •The maximum claim amount that has the minimum probability of occurring in any single trial
- •The midpoint between the minimum and maximum expected claims across all simulation trials
- •The minimum aggregate stop-loss attachment point that maximizes the probability of recovery
- •The smallest of a set of maximum possible losses, each of which occurs in the most unfavorable outcome of a strategy followed by a participant
Show answer
The smallest of a set of maximum possible losses, each of which occurs in the most unfavorable outcome of a strategy followed by a participant
The course defines minimax as the smallest of a set of maximum possible losses each of which occurs in the most unfavorable outcome of a strategy followed by a participant. Expected claims are shown along with minimax ranges for various confidence percentages.
- 98
Which of the following is NOT listed as a reason why Monte Carlo simulation is valuable to a self-funder?
- •It eliminates the need for actuarial certification of claim reserves
- •It may legitimize COBRA premiums
- •It quantifies the economic value of various stop-loss arrangements
- •It requires no specially prepared data by the plan and is modestly expensive
Show answer
It eliminates the need for actuarial certification of claim reserves
The course lists four reasons for simulation: (1) modest expense requiring no specially prepared data, (2) may legitimize COBRA premiums, (3) raises understanding and comfort level, and (4) quantifies economic value of stop-loss arrangements. Eliminating actuarial certification is not listed.
- 99
A practical difficulty with Monte Carlo simulation for healthcare plans involves complicated benefit structures. What specific example does the course provide?
- •Capitated benefits must be excluded from the simulation because they have no claim variance
- •High-deductible plans produce bimodal claim distributions that cannot be modeled with a single lognormal curve
- •In-network and out-of-network claims require separate simulations with different probability distributions
- •Medical, dental, and prescription are all plan benefits where medical only counts toward specific stop-loss, but all three count toward aggregate
Show answer
Medical, dental, and prescription are all plan benefits where medical only counts toward specific stop-loss, but all three count toward aggregate
The course identifies complicated benefit structures as a practical difficulty, specifically where medical, dental, and prescription are all plan benefits and medical only counts toward specific, but medical, dental, and prescription all count toward the aggregate.
- 100
The course identifies three types of anti-selection. Which type is described as 'deadly'?
- •Cumulative anti-selection, where healthier participants leave and sicker remain
- •External anti-selection, where participants seek coverage when they expect to need it
- •Internal anti-selection, where participants choose between high/low or HMO/indemnity options
- •Pricing anti-selection, where participants switch to the lowest-cost option each enrollment period
Show answer
Cumulative anti-selection, where healthier participants leave and sicker remain
The course identifies three types: External (controlled by underwriting), Internal (described as 'irksome'), and Cumulative (described as 'deadly'). Cumulative anti-selection occurs when healthier leave and sicker remain, as with COBRA beneficiaries or MEWAs where better groups leave and poorer groups remain.
CSFS is the Certified Self-Funding Specialist designation. These are my own practice questions, written while studying for the exam. This site is not affiliated with, endorsed by, or connected to the organisation that administers the CSFS designation, and nothing here is official exam content or a substitute for the course material.
Studying now, placing business later
When you are ready to quote one, the directory lists the markets, DPC providers, RBP vendors, PBMs and administrators that serve each state — with what each one publishes about group size and underwriting.
Spotted a wrong answer? Email sam@edw4rds.com and it gets fixed.